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10 reasons why your company needs a carefully drafted Memorandum of Incorporation

1. If your company is a private company and a standard form Memorandum of Incorporation is used, your company will lose its status as a private company, since the standard form does not restrict the transferability of shares, as is required by the definition of private company in the new Companies Act. Such a company will become a public company, and will have to comply with the requirements for public companies, e.g. it must be audited, it must hold an AGM and it must have at least three directors

 

2. Your current Articles of Association may require your company to undergo an annual audit, while this is not required by the new Act. The obligation to undergo an audit will remain until you have replaced the articles with a new Memorandum of Incorporation. If you are obliged to undergo an audit, your company will, according to the new Act, be required to have at least three independent directors to serve on the audit committee.

 

3. If your company’s Memorandum of Incorporation does not provide otherwise, each director will have only one vote at board meetings, despite the relative shareholding of the shareholders who appointed the various directors. The standard Memorandum of Incorporation does not deal with this.

 

4. As the Companies Act stands, it is not possible to comply with its requirements for setting of a record date and notice periods since these provisions are drafted in a contradictory way. This problem can be corrected in a properly drafted Memorandum of Incorporation. The standard Memorandum does not deal with this aspect.

 

5. In terms of the Companies Act, directors can unilaterally make far-reaching rules which apply to the company without the shareholders’ consent. The Memorandum of Incorporation should limit this power, but the standard Memorandum does not.

 

6. Even more concerning for shareholders, is the power of directors to unilaterally increase the authorised share capital of the company, and amend any of the rights attached to any class of shares. Again, the Memorandum of Incorporation can curtail this power, but the standard Memorandum does not.

 

7. Unless a properly drafted Memorandum of Incorporation provides otherwise, the directors will also have the right to unilaterally issue debt instruments. Under the previous Act, the directors only had this power if it was specifically granted to them in terms of the articles.

 

8. If your company has preference shares, you will need to insert provisions dealing with voting on matters that affect the rights attached to these shares, since shareholders of another class of shares will, according to the Act, have the right to vote on the preference shares’ rights also.

 

9. The standard form for a Memorandum of Incorporation contained in the regulations to the Companies Act contains several errors in addition to the ones highlighted here and is incomplete.

 

10. A properly drafted Memorandum of incorporation will be custom-made to suit the needs and preferences of your company and its stakeholders. So you can, for example, lower or increase the percentage required for particular decisions; vary quorum requirements for general meetings; set the term of office for directors; decide whether meetings can be conducted by electronic communication, etc. A custom-made Memorandum will decrease your legal and commercial risk and increase business efficiency to give you a competitive advantage.

 

Please also note that you need a new Memorandum of Incorporation as soon as you amend your current Memorandum of Association, Articles of Association, your shareholders agreement, or any agreement with your directors or shareholders. Currently you can register a new Memorandum of Incorporation free of charge, but that will not be the case in the future.

-Trudie Broekmann

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